What is Total Expense Ratio (TER)
Total Expense Ratio, or TER, is a single number that shows how much a fund charges its investors each year. It is usually shown as a percentage of the fund's assets. If a fund has a TER of 0.75%, that means the fund takes 0.75% of the fund value every year to cover its costs.
TER lets you compare the cost of one fund with another. Costs reduce your returns. So TER matters.
What TER includes
TER covers annual running costs of a fund. Common items are:
- Management fee paid to the fund manager
- Administrative costs and custody fees
- Legal and audit fees
- Marketing and distribution costs that are charged to the fund
- Fund accounting and reporting costs
The goal of TER is to show the ongoing cost of owning the fund. It is usually calculated once a year and published in the fund documents.
What TER does not include
There are some costs that TER may not show. These hidden or extra costs can also reduce returns:
- Transaction costs when the fund buys or sells assets. These include broker fees and market impact.
- Bid-ask spread for traded securities.
- One-time charges like entry loads or exit fees if they exist.
- Performance fees that the manager may charge if they beat a benchmark. In some cases these are shown separately.
- Taxes paid within the fund in some jurisdictions.
Because of these exclusions, TER gives a good but not perfect picture of total cost.
How TER is calculated
The basic formula is simple:
TER = (Total annual fund costs / Average net assets) × 100
Example:
- Fund assets: 100 million
- Annual costs: 750,000
TER = (750,000 / 100,000,000) × 100 = 0.75%
Most funds publish TER in their annual report or key investor information document.
Why TER matters
Fees compound like returns. A small difference in TER can lead to a large difference in your ending balance over time.
Example with simple math:
- Starting amount: $10,000
- Annual return before fees: 6%
- Time: 20 years
If fund A has TER 0.20% and fund B has TER 1.20%, the net returns are:
- Fund A net return: 5.80%
- Fund B net return: 4.80%
After 20 years:
- Fund A: $10,000 × (1.058)^20 ≈ $31,700
- Fund B: $10,000 × (1.048)^20 ≈ $25,900
Difference: $5,800. That comes only from the 1 percentage point higher TER.
If your time horizon is long, pick lower cost options. If the manager consistently outperforms net of fees, a higher TER may be worth it. But that outperformance is rare and hard to predict.
TER in practice
- Passive funds and ETFs tend to have lower TERs. They mostly track an index and need less active work.
- Active funds usually have higher TERs because managers trade more and research costs are higher.
- Index funds can be remarkably cheap. Some ETFs charge under 0.05%.
- Beware of funds with unusually low TERs but poor liquidity or hidden costs.
How to use TER when choosing a fund
- Compare funds that aim for the same goal. TER only matters between similar funds.
- Look at long term net performance, not just TER. A low TER does not guarantee good returns.
- Check for other fees: entry/exit charges, performance fees, and expected transaction costs.
- Read the key investor information and annual report for the exact TER and what it covers.
- Consider tax efficiency and how distributions are handled in your situation.
Quick checklist
- Find the TER in the fund factsheet or prospectus.
- Ask if transaction costs are included.
- Compare TERs across similar funds.
- Remember that lower TER usually helps long run returns.
- Only pay higher TER if past performance net of fees is strong and consistent.
FAQ
Q: Is TER the same as expense ratio? A: Yes. TER and expense ratio are often used interchangeably. Some countries use one term more than the other.
Q: Can TER change over time? A: Yes. TER can go up or down depending on costs and fund size. Larger funds can lower TER because fixed costs spread over more assets.
Q: Should I pick the fund with the lowest TER? A: Not always. Low TER is a plus, but you should also check strategy, tracking error for index funds, and historical net performance.
TER is a simple number that helps you see the ongoing cost of a fund. Use it to compare funds. Combine it with performance data and the fund's strategy before you decide.